Today marks national EITC Awareness Day, highlighting one of the most effective tax credits for working families in the state and federal tax system. The Earned Income Tax Credit is a one-two punch of economic impact that bumps up everyone’s bottom line and benefits every corner of the state, and Gov. Gretchen Whitmer’s proposal and other state and federal efforts to increase and expand the EITC are working to give it even more oomph.
The EITC is a tax credit for working people with low incomes (those with incomes below $53,865 for a married couple with two children in 2021) that puts money in the pockets of workers who need it most so they can meet basic spending needs. A few hundred dollars can help not only families, who can use it to keep up with bills or pay for car repairs, but also our economy, which benefits from additional spending at local businesses.
The EITC is going to impact even more workers than usual this year, thanks to a number of temporary provisions in the American Rescue Plan Act (ARPA) to expand eligibility and make it easier for workers affected by the pandemic to claim the credit. While the changes apply only to the federal EITC, Michigan taxpayers may also earn a larger state EITC since it is calculated at 6% of the federal credit.
The “lookback” provision. For the second year in a row, the IRS will allow tax filers to calculate their EITC using either their 2019 or 2021 income, whichever is higher. For workers who have been displaced at work or saw their income decline in 2021, this provision ensures such work disruptions do not diminish your credit.
Expanded eligibility for workers without children. While the maximum federal credit for workers without qualifying children would typically be capped at $543, ARPA increases the maximum for workers without qualifying children to $1,502. Age restrictions have also been eliminated, so previously ineligible workers aged 19-25 as well as those over 65 without children can benefit from the tax credit. The age is lowered even further to 18 for youth formerly in foster care or who have experienced homelessness. An estimated 600,000 Michigan workers without children will benefit from the EITC expansion in ARPA this year.
The future of the federal EITC is uncertain. Although Build Back Better has stalled in the U.S. Senate, hope remains that a deal can be secured to make permanent the expanded EITC eligibility introduced by ARPA. The national Institute for Taxation and Economic Policy estimates 569,200 Michigan workers would benefit from a permanent expansion for workers not raising children. These workers would see a federal tax cut of $710 on average, which would put over $404 million back into Michigan’s local economy. The expansion is especially important for Black and Hispanic workers, who are more likely than white workers to earn “poverty-level” wages.
The need to expand the EITC to workers without dependents is clear. The EITC and Child Tax Credit, alongside the standard deduction, ensure families with children will not owe taxes if they are earning poverty-level wages. Without an expanded EITC, these workers are the only group that can be taxed into poverty.
Michigan should not wait for federal action. Despite a lack of progress at the federal level, the state Legislature can move forward on its own to strengthen the EITC for Michigan residents. Increasing the state credit has support on both sides of the aisle. Whitmer proposed to increase the EITC from 6% of the federal credit to 20% of the federal credit, while Sen. Wayne Schmidt has introduced an increase in the state EITC to 30% of the federal credit. This bill would increase the maximum credit from $32.58 to $162.90 for workers without qualifying children and raise the credit from $150 to $700 for the average Michigan family, though it does not expand access for currently ineligible workers.
Make sure to claim your credit. IRS data shows 20% of Michigan taxpayers do not claim the federal EITC even when they are eligible. If you think you may be eligible, make sure to file your federal and state returns by April 18. If you earn less than $58,000, the Volunteer Income Tax Assistance (VITA) program is available to help you file for free—just call 2-1-1 to find a site in your county.
The Earned Income Tax Credit is one of the best anti-poverty policies at policymakers’ disposal. The Michigan League for Public Policy will continue to promote the EITC for residents who are eligible, but we are especially excited to see EITC awareness turning into EITC action at the state and federal level.
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